I have written in the past about the unique attributes of ClickSoftware (CKSW) and the underlying investment opportunity. Now, I re-affirm the investment thesis previously presented by way of a quick checkpoint review and updated fundamental value, and point to an attractive entry point under current market conditions.
ClickSoftware provides automated workforce management and optimization solutions for every size of service business. The company’s technology helps businesses find the right balance between reducing costs on the one hand, and increasing customer satisfaction, maximizing employee skills and complying with industry regulations, on the other.
Concordant with ClickSoftware’s industry leadership is the company's announcement, early this year, regarding the launch of the ClickAppStore to deploy mobile workforce management solutions. This is a service store that offers a variety of ready-to-use modular apps, and a development environment where the applications can be assembled into end-user solutions under the guidance of experienced professionals as needed.
The ClickAppStore had been used internally to deploy mobile workforce management solutions for prime-line clients such as Sempra Energy (SRE), Vivint, ETSA Utilities, Portugal Telecom (PT), YES, Questar Gas, Skanska (SKSBY.PQ), and OnStream (ONSM).
In its Q 6/11 financial results announcement the company indicated that the ClickAppStore expanded market leadership in mobile business apps, and that increasing demand for workforce and service optimization supported continuing business growth. Consistent with this view, the company reiterated previously issued guidance of 2011 revenues in the range of $81.5 million to $85.0 million, representing about 15% to 20% over 2010.
|ClickSoftware (CKSW) Chart --Selected Metrics|
|(Amounts in millions of US$, unless otherwise noted)||FYE 12/07||FYE 12/08||FYE 12/09||FYE 12/10||4-Yr. Avg.||Q 6/10||Q 6/11|
|Revenue Growth (y-o-y)||23%||31%||17%||16%||22%||18%|
|EBIT / Revenues||3%||12%||18%||14%||15%||16%|
|Cash Flow from Ops.||4.91||8.54||7.55||16.37||3.98||6.58|
|Cash Flow from Ops. / Rev's||12%||16%||12%||23%||23%||32%|
|CF f/Ops.Growth (y-o-y)||-13%||74%||-12%||117%||42%||65%|
|Free Cash Flow||4.29||7.79||6.15||15.12||3.46||6.02|
|FCF / Revenues||11%||15%||10%||21%||20%||29%|
|FCF Growth (y-o-y)||-18%||82%||-21%||146%||47%||74%|
|Debt Service Obligation||0.00||0.00||0.00||0.00||0.00||0.00|
|Cash (& Market.Secs.)||24.70||32.00||34.97||50.00||42.50||56.41|
The chart shows steady growth in revenues, EBIT, Cash Flow from Operations, and in Free Cash Flow for the four year period ending in 12/31/10. Similarly attractive growth was registered in Q 6/11, y-o-y.
One way to describe historical performance is steady and strong, particularly as it applies to revenue growth and high free cash flow content in revenues. In Q 6/11 revenues grew 18% y-o-y. FCF (representing 29% of revenues) grew 74%.
Underlying rapid growth is a basic supply and demand proposition. The company offers automated workforce management and optimization solutions for service businesses--a response to the universal need for productivity improvement. Importantly, such response enhances competitiveness during periods of economic growth and even more crucially in times of weak aggregate demand.
The history of revenues, EBIT, and FCF shown in the chart evidence reliable product demand, sustained pricing power, and the consequent ability to generate free cash flow, even during periods of weak economic growth, as 2008-2009.
Such cash flow generation, absence of debt, and abundant surplus cash, are taken as aggregate proxy indicators of relatively low business risk.
Management’s 100% focus on automated workforce management and optimization solutions, and the company’s operating track record, provide evidence that business risk is appropriately aligned with the firm’s core competence.
ROIC (NOPAT / Operating Capital) is perhaps one of the most comprehensive measures of performance. It speaks to the firm’s effectiveness in utilizing financial resources for the creation of shareholder value.
ROIC is extremely high. It amounted 137% in FYE 12/10 (137%), 105% FYE 12/09, 103% Q 6/11 and 94% for Q 6/10. ROIC well exceeds the Weighted Average Cost of Capital (WACC), estimated at 10% to 12%, resulting on substantial creation of shareholder value.
ClickSoftware is an extremely efficient user of Operating Capital. Usage of net Operating Working Capital (NOWC) and of Operating Long Term Assets (OLTA) is relatively very small in comparison with funds generated from operations (NOPAT).
Efficiency in the use of Operating Capital and robust NOPAT enables sufficient internal generation to finance product development, support rapid revenue growth, pay dividends, and grow surplus cash.
For the first time in its history, on 4/27/11, ClickSoftware approved the distribution of a $0.32 per share dividend (net of required tax) to be paid quarterly in four equal amounts. The first quarterly dividend of $0.08 per ordinary share was paid on May 26, 2011. This represents a cash outflow of approximately $10.5 million per year, or 19% of cash balances at Q 6/11 (On 7/25/11 the company announced that the second quarterly dividend payment of $0.08 per ordinary share will be paid on 8/25/11).
The determination to pay dividends coupled with the company’s revenue growth guidance for 2011, add confidence in its prospective performance.
Fundamental value is conservatively estimated at $10.30/share based on some $12.0 million in FCF generated from $85.0 million guided 2011 revenues, and a conservative growth rate going forward (10% for the next 3 years, following by 5% in perpetuity). WACC is 10%.
The company’s financial track record as depicted in the chart, dividend policy, recent announcements regarding product expansion, and 2011 guidance, suggest that rapid organic growth is sustainable at a relatively low business risk.
Current market conditions offer an attractive entry point at $8.84/share. The discount to fundamental value represents a 17% potential gain, in addition to 3.8% dividend yield.
Disclosure: I am long CKSW.
Additional disclosure: The views expressed represent a personal opinion, not an investment recommendation. Please do your own due diligence. Careful attention has been given to accuracy. Nonetheless, computations entail a probability of error, which is entirely possible.